How the number of credit cards you have impacts your credit score

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One of the questions most often asked by consumers is how many credit cards they should have. Some folks are concerned they have too many cards and that this might bring down their credit scores. While others are worried that they don't have enough cards and perhaps that will cause a bad score. Well, you can relax because there's no magic number.

Your credit cards do have an impact on your credit score, but the quantity alone doesn't matter. It has more to do with your credit utilization ratio than with the sheer number. And if you have a lot of credit cards, this can impact your ratio.

Opening a new account may ding your score

For starters, you need to consider that when you open a new card, your score will get dinged anywhere from zero to 5 points. The exact amount is impossible to pinpoint, but be prepared for a small hit to your score.

This isn't a problem for most people, but if you're planning to open new credit or apply for a mortgage anytime soon, don't start opening new accounts. You want your score to be as high as possible when you apply for a loan or a mortgage.

More credit cards gives you more available credit

Your credit utilization ratio is a very important number. Your ratio is the amount of credit you've used compared to the amount of credit you have available. If your ratio is higher than 30 percent, it can drag down your credit score. If you're trying to improve your score, keeping your ratio closer to 10 percent is ideal.

So how does the number of cards affect your ratio? Let's say you have two credit cards and they each have a limit of $2,000. Your total available credit is $4,000. Now, let's also say that you've purchased $1,000 worth of items with your cards. Your ratio is 25 percent (1,000 / 4,000 = .25, or 25 percent).

Now, what if you have three more cards with $2,000 limits each for a total available credit of $10,000? Here's your new ratio: 1,000 / 10,000 = .100, or 10.0 percent. As you can see, having more cards can help lower that ratio, which in turn, can help improve your score.

The utilization ratio on each individual card is also factored into your score. So having several cards allows you spread out your purchases while maintaining a low ratio on each card. But remember, this is only a good strategy if you pay the bill in full by the due date every month.

The downside of a lot of available credit

There's the risk of spending more simply because you can. So when you have a lot of credit cards, you have to be confident that you can handle that much available credit. The point is to improve your score and maybe earn rewards, not buy a new wardrobe or home theater system. So be sure you have a budget and that you track your spending.

If you aren't keeping tabs on your expenses, you know what could happen? You could spend a lot more than you can pay off in one month. If that happens, you're carrying a balance and paying interest. Remember, if your ratio starts to exceed 30 percent, your score will suffer.

Increase your credit score without adding new cards

If you aren't comfortable adding cards to your wallet, that's fine. You can lower your ratio with one simple phone call. Choose a card that has a small credit limit and call your credit card issuer to ask for an increase.

Now, this works best if you've been a good cardholder. If you've been making late payments, don't try this because it could backfire. The issuer might look at your file and decide you're too risky to have the limit that you currently have. You can guess what could happen, right? The issuer might actually lower your credit limit. This would increase your ratio and that takes your score in the wrong direction.

So however many cards you have, make sure you use them responsibly. When it comes to your score, that's what really matters.

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